How to Find the Best Stocks for Covered Calls
Not all stocks are equally suited for covered call writing. The best covered call candidates share several key characteristics: moderate implied volatility (25-45%), highly liquid options markets, fundamentally sound businesses, and stock prices that trend gradually rather than in violent moves. Finding stocks that meet all these criteria is essential for building a profitable and sustainable covered call income portfolio.
The ideal covered call stock generates enough premium to make the strategy worthwhile (at least 1% monthly yield) while having low enough risk that the premiums actually translate into profit over time. A stock with 80% implied volatility might offer enormous premiums, but it probably moves so violently that you will frequently be assigned at losses or miss out on massive rallies. Conversely, a stock with 10% IV generates so little premium that the effort and capital commitment are not justified.
Ideal covered call stocks have: (1) IV between 25-45%, (2) options volume > 5,000/day, (3) bid-ask spread < $0.10, (4) stock price $30-$300, (5) fundamentally sound business, and (6) no upcoming binary events. Stocks in this sweet spot generate 1-3% monthly premium yield with manageable risk.
Stock Screening Criteria for Covered Calls
Top Covered Call Stock Categories
| Category | Examples | IV Range | Monthly Yield | Risk Level |
|---|---|---|---|---|
| Blue-Chip Tech | AAPL, MSFT, GOOGL | 20-35% | 1.5-3% | Moderate |
| Large-Cap Value | JNJ, PG, KO, PEP | 15-25% | 0.8-1.5% | Low |
| Growth Tech | AMD, NVDA, TSLA | 35-60% | 3-6% | High |
| Financial | JPM, BAC, GS | 20-35% | 1.5-3% | Moderate |
| Energy | XOM, CVX, SLB | 25-40% | 2-4% | Moderate-High |
| Biotech | ABBV, AMGN, GILD | 20-35% | 1.5-3% | Moderate |
| REITs | O, AGNC, NLY | 18-30% | 1-2% | Moderate |
| Telecom | T, VZ, TMUS | 18-28% | 1-2% | Low-Moderate |
- 1AAPL yield = $3.50/$185 = 1.89%, liquidity excellent, spread tight → Score: A
- 2AMD yield = $7.00/$150 = 4.67%, liquidity very good, higher risk → Score: A-
- 3KO yield = $0.70/$60 = 1.17%, liquidity good, low risk → Score: B+
- 4AAPL: Best balance of yield, liquidity, and risk
- 5AMD: Higher yield but more volatile (bigger drawdowns possible)
- 6KO: Lower yield but very stable, good for conservative portfolios
What Makes a Stock Bad for Covered Calls
- Very low IV (< 15%): Premium too small to justify the effort and capital
- Very high IV (> 60%): Usually indicates excessive risk (biotech catalysts, meme stocks)
- Low options volume (< 1,000/day): Wide bid-ask spreads eat into premium
- Pending binary events (FDA approvals, merger votes): Unpredictable gap risk
- Declining fundamentals: Ongoing stock decline will exceed premium income
- Stock price under $20: Premiums are too small in absolute terms
- Highly correlated portfolio: All stocks moving together eliminates diversification benefit
Building a Covered Call Portfolio
Portfolio Construction Guide
Use your broker's options screener to filter for: IV rank > 30%, options volume > 5,000/day, bid-ask spread < $0.10, and market cap > $10B. Popular screeners: Fidelity Options Screener, TD Ameritrade ThinkOrSwim Scan, or free tools like Barchart and MarketChameleon.